Intangibles and Endogenous Firm Volatility over the Business Cycle

Hernan Moscoso Boedo and Pablo D'Erasmo

No 97, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This is a theory of endogenous volatility over the business cycle based on firm-level intangible expenditures. We propose a firm dynamics model with endogenous market participation. Firms that incur higher intangible expenses are able to serve more markets and diversify market-specific demand risk. The model is driven only by TFP shocks and captures the business cycle properties of firm-level volatility and intangibles expenditures. We empirically document that firm-level volatility is counter-cyclical and that intangible expenses are pro-cyclical. Consistent with our model, using data from the Kauffman Firm Survey and Compustat, we find that firm-level idiosyncratic volatility is negatively correlated with intangible expenditures.

Date: 2013
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Working Paper: Intangibles and Endogenous Firm Volatility over the Business Cycle (2011)
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